The Fixed or Indexed Decision


In 2016 we experienced a large rise in the sale of fixed annuities.  This makes some sense as we moved through an uncertain political landscape in a falling interest-rate environment ... clients were looking for safety and guarantees.  However, the use of fixed indexed annuities can provide the same downside safety and produce similar, if not better, returns than a traditional fixed annuity. 


Our office took a look at the past 30-year-returns of a fixed indexed annuity—using current cap rates—and compared the results from a multi-year fixed rate annuity.  The results surprised me.  With a 5.25 percent cap rate in years 1-4; a 5.00 percent cap rate in years 5-6; and a 4.75 percent cap rate after that, we compared the 7-year accumulation values against a 2.85 percent guaranteed return over the same period.  More than 93 percent of the periods over the past 30 years resulted in a higher fixed indexed annuity value than the 2.85 percent guarantee. 


When the fixed rate did exceed the FIA accumulation, the difference was only an average of $288 over the 7-year period.  When the FIA’s accumulation was higher, the average gain over the fixed rate was $7,876 over the 7-year period.  While the risk exists that the client may have zero interest credited during a period when the index had no gains, history tells us that there is a 93 percent chance the client will have more value with a FIA versus a fixed-rate instrument, given today’s rates. 


Even better, we are seeing the use of advisory-based FIAs emerge in the market place.  Due to the lack of commission built into the product, cap rates are substantially higher.  However, even with a 75bps fee assumed in the analysis, there was a 100 percent historical experience that the FIA outperformed the interest rate.  Too often, we look at fixed annuities or bonds to balance our equity risk or remove interest- rate risk.  The FIA can provide the same downside protection and higher potential returns if the client is willing to risk the small guaranteed rate.  In forgoing that guarantee, the client maintains principal protection and higher potential yields.


It’s time to relook at FIAs as a part of the portfolio and not just sell what is easy.  Instead, let’s take time to educate our clients on the value and potential benefits of owning a FIA, which can provide access to downside protection, no interest rate fluctuations, guaranteed income and tax-deferred growth (assuming non-qualified assets).  And, historically, your client is in a better position to earn a higher accumulation value over a typical 7-year surrender period.  Take the time to look at an alternative to bonds for a portion of your clients’ portfolios.


Call Ash Brokerage for more information on our research and learn how FIAs can be a better solution for your clients’ annuity and bond needs.


Winning Strategy:

Research shows that the accumulation values in FIAs have outpaced multi-year guaranteed fixed-rate annuities.  Take time to look at alternatives that can better your client portfolios. 


About the Author

Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of annuities at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”

FIA Fixed Annuities Annuities

The Right Tool for the Job


I’m not the handiest person around, so it’s no surprise I don’t enjoy fixing things around the house. When I do tackle a project however, the experience is completely different when I have the right tool instead of using something that just gets the job done. The right size socket as opposed to an adjustable wrench, for example.

When it comes to your clients, helping them select the best options on a fixed indexed annuity (FIA) can make it the right tool for retirement income.

We all know that over a longer time horizon you will achieve better returns in the stock market, which makes variable annuities (VAs) with subaccounts attractive to many clients. During the accumulation phase of building up your portfolio, VAs are an attractive piece of the puzzle. However, coming down the stretch or at the beginning of the withdrawal period, there are several things that work against the variable model and favor a fixed indexed option.   

First, we all know that an ill-timed negative year can have a major impact on the value of the account. An FIA takes the negative year off the table. Are you giving up the potential for a larger gain? Yes, but if your client no longer has the time horizon to weather a double-digit negative year, it’s a small price to pay. If you’re saying, “That’s why we have a roll-up and a guaranteed lifetime withdrawal benefit,” I agree.   


The fees in the VA are going to be higher than the FIA. The rider fee may be similar, but when you factor in mortality and expense fees, as well as administration and investment fees, your VA could be charging you 3 percent, 3.5 percent or even more. An FIA will limit your fees to somewhere around 1 percent annually. In distribution, fees become even more critical to your portfolio. If you’re taking a 5 percent lifetime distribution and being charged 3 percent per year, are you going to have greater than 8 percent annual returns? If you’re using the income rider, does it allow for a portfolio that can generate that type of return, or does it give you limited investment options associated with the rider? I think you would have to agree that your VA is no longer an accumulation vehicle.  

Sequence of Returns

Just as important as the fees is the sequence of returns. If you’re arguing that you are using the VA to maintain an account value or grow the asset during distribution, a double-digit negative year can make than prospect almost impossible. Obviously, a repeat of 2008 would be devastating to any allocation, but even during the early years of distribution, a 15 percent decrease would be difficult to overcome. Add in the fees, and what would it take to see an increase in income or maintain your account value?

Fixed Indexed Advantages

Now that we are looking for an annuity that works as a distribution tool, why is an FIA a better option?  FIA offer your clients:

  • Higher rollup rates than you will find in VAs, which allow for greater guaranteed income potential
  • Higher distribution rates, which allow for higher guaranteed payments in retirement
  • Increasing payout options that aren’t tied to the account value, eclipsing the income value
  • Fees only associated with the benefit of having a guaranteed income that you cannot outlive
  • No negative performance impacts to the account 


The Bottom Line: An FIA can be the right tool for the income portion of your client’s annuity portfolio. The right product and rider can be an efficient income generator to meet their income needs for a lifetime.


Fixed Annuities

Now is the Best Time to Sell Fixed Annuities!


Many may question my sanity when they read the title of this blog. You might think that you can’t put your client in a fixed account during some of the lowest interest rates in the U.S. history. However, in sales, it is all relative to the current situation, environment and client attitude. 

Try positioning the current fixed sale in relation to the impact the current interest rate can have on your client’s funds in terms of year. One of our top sales professionals challenges his advisors to change their mindset and look at ways to impact their clients – he uses the Rule of 72. This rule, discovered by Einstein, says you can take the number 72 divided by your interest rate and you’ll have the number of years it will take to double your client’s money. It’s an easy tool to show clients how you can impact their savings. 

Let’s assume that we were selling fixed annuities in the mid-2000s, when CD rates hovered around 4 percent. Using the Rule of 72, we know it would have taken 18 years for your clients to double their money (ignoring taxes and inflation). During the same time, fixed annuities were selling for around 5 percent. That would have allowed you to shorten their money-doubling time to 14.4 years.  

In today’s rate environment, five-year CDs are paying clients around 1 percent, while a typical fixed annuity is paying around 2.25 percent.* You might not think those rates are attractive, but change your attitude by focusing on time, not rates. It would take 72 years for clients to double their money with a 1 percent CD. For clients with a fixed annuity at 2.25 percent, you reduce that cycle down to 32 years. A 40-year difference is far more significant than the four-year difference you would have made in the clients’ situation in the mid-2000s.  

Re-examine how you think about fixed annuities in the low-rate environment. Focus on the client and how fixed annuities can positively impact their financial position relative to other solutions. When you look at the impact you can deliver, your clients will appreciate the conversation.  

The Bottom Line: We need to change how we look at the fixed annuity market. We can have more impact selling a fixed annuity today than we did when an annuity earned 5 percent interest. 


*Source: as of Dec. 15, 2014.


Fixed Annuities

The best ‘worst case’ alternative


“The best ‘worst case’ alternative” – that’s how a large variable annuity producer recently described and positioned fixed-index annuities with income riders. It’s not the most ringing of endorsements – a glass-half-empty view – but it’s still extremely significant and impactful. 

I would argue that a more accurate description may be, “the best ‘most probable outcome’ alternative” – a glass-almost-full view.  

Whether you see the glass as half empty or half full, making the right choice between VA and FIA income riders can mean the difference between having a client whose objectives and expectations have been met OR having a client who may have to settle for less than expected – or worse.  

There are three steps to making a good decision:

  1. Collect all of the available facts
  2. Consider possible and probable factors that may influence those facts
  3. Take action … or not (Inaction is also a decision)

Positive or negative, whatever happens after the decision is made won’t change the fact that you made the best possible decision. 

So, if we just look at the income rider portion of the VA or FIA choice, what are the facts you should consider to help your client make a good decision?

  • FIA rollup percentages are routinely greater than those of VAs
  • FIA payout percentages, on the income values, are higher than VAs
  • If a FIA gives your client a higher, guaranteed income value AND pays a greater guaranteed percentage on that value, your client gets greater guaranteed lifetime income from a FIA!   

Next, what other factors should you consider in your decision process?

  • Performance – VAs were designed to be performance engines. With a VA, it is argued that if the returns out-perform the rollups, the client benefits with higher-than-guaranteed income. That is true, but:

    • How likely is that to happen? With an assumed VA fee of 3.5 percent to overcome and a guaranteed rollup of 6 percent, how likely is it that a 9.5 percent return will be realized in a VA to actually increase the guaranteed income payout? Also, even though high returns can occur in a VA in any given year, the total return of the VA must overcome fees and exceed the rollup over the entire deferral period, not just in a given year!

    • The same thing can be said of FIAs. Though it’s less likely to occur in a FIA than in a VA, it does happen. Case in point, I recently received policy statements on two clients whose five-year FIA performance has out-performed their rollup values.  

  • Increasing income opportunity once income is elected – If your client considers income important now, won’t it be even more important in the future – perhaps even critical? Increasingly, FIAs are offering clients income checks that increase and lock in as the selected indexes perform. While VAs may claim to offer opportunity here, evidence that this actually happens is not readily available.

  • Protection of the accumulated account value – While it is critical for our clients to plan, the best-laid plans don’t always work out or reach fruition. If everything goes well (glass half full) and the market cooperates, your choice of either a VA or FIA with an income rider may not be that critical – they’ll both perform, the income riders will kick in and perhaps the VA will even provide a little extra income due to long-term, solid subaccount performance. 

BUT … (glass half empty) if circumstances are such that your client can’t wait the planned number of years to take income, and they need access to their account values NOW, poor market performance in the VA could result in a diminished account value or even one less than the original contract deposit. This would not happen in a FIA.

In summary, a FIA provides greater guaranteed income – that can be structured to increase – as well as an account value protected from negative market performance. A VA could potentially provide a somewhat higher guaranteed income and a fluctuating account value.

So, what’s your decision? A FIA? A VA? A combination of both?

Annuities FIA VA Fixed Variable Annuity

Uncovering New Sales


I’m often asked where advisors are finding client funds for fixed and indexed annuities in our current economic environment. In my opinion, most annuity sales are coming from three sources: equities, banks or bonds.

As financial markets reflect increasing volatility, more and more advisors are suggesting that their clients take some of their gains from the last few years off the table. Clients are increasingly open to the idea of protecting their gains by moving some of their equity assets into guaranteed products such as fixed and indexed annuities. Investors who, during the past 14 years, patiently stayed in the market through two severe corrections, are anxious to protect themselves against another potential downturn.

I think banks are the most obvious source of annuity funding. With consumer deposit rates hovering at historic lows for more than five years, clients who’ve been waiting for higher rates are running out of patience. The quest for a higher return without principal fluctuation risk lends itself naturally to fixed and indexed annuities. 

In bonds and bond funds, there’s an entire generation of investors who’ve never experienced a prolonged bear market. As advisors are looking at their clients’ asset allocations, many are looking for bond and bond fund alternatives that are not subject to principal deterioration if rates start to rise. Again, fixed and indexed annuities are often the best solution.

You should take a fresh look at your practice’s current client files. Chances are, annuity sales are waiting to be uncovered. Ash Brokerage is here to help you choose the appropriate fixed or indexed annuity for all your clients’ needs.

Equities Bonds Banks Sales Annuities Fixed Indexed